The archived blog of the Project On Government Oversight (POGO).

Oct 11, 2012

The Affordability of Defense Contractor CEOs

There has been a lot of talk about what America will be able to afford in the coming years. And yet for the last decade, the Pentagon has received a blank check for all kinds of pricey, and often ineffective, weapons systems too often designed to fight enemies we don't have.

Secretary of Defense Leon Panetta and many top defense contractor CEOs have said we can't afford the 10 percent budget cut to the Pentagon that would come with sequestration. Some defense contractor CEOs are arguing that sequestration will cause massive job losses, even though history doesn't support that conclusion.

On October 1, Wes Bush, CEO of top defense contractor Northrop Grumman, sent an email to Northrop employees asking them to oppose the sequestration cuts and to personally contact their representatives.

Bush closed the email by saying, "In this time of tremendous uncertainty, our customers will need to make difficult decisions—decisions influenced by how they view those who are producing the capabilities and services they seek and require. Ultimately, program performance and affordability are the drivers of these customer perspectives."

Since the U.S. taxpayer is Northrop's largest customer, it's worth noting that as Bush talks of affordability, he received $26.2 million in total compensation in 2011. That's more than the CEOs of Lockheed Martin, Boeing, or Raytheon, though the crown for highest compensated defense CEO goes to David Cote of Honeywell, who raked in $35.7 million last year.

Interesting that Bush talked about affordability and potential job losses when he makes more in a single working day than the average defense employee makes in a year.

Northrop is part of a bloated defense industry that produces weapons so consistently behind schedule and over budget that an on-time, on-budget program would be cause for a parade. If program performance and affordability are so crucial in this time of tight budgets, maybe Northrop and the other major defense contractors should focus on creating an industrial defense system that builds affordable, effective weapons the Pentagon wants and needs instead of spending its time raising the specter of massive layoffs.

Andre Francisco is an online producer with the Project On Government Oversight. Image from Flickr user GovWin a Deltek Network.

The usual industry smoke screen. Get this through your head, Ed. The US taxpayer pays 100% of the CEO of Lockheed's $25 million salary. Not $750,000 of it. ALL OF IT! What part of that do you not understand? The same goes for Northrop Grumman. Only Boeing, of all the government contractors, has any significant commercial income.

Ed, thank you again for your thoughtful comment. We really do appreciate people who care deeply about what we do and that it be done correctly. It’s true that contractor compensation is capped at $763,029 taxpayer-reimbursement (the cap applies to “any contractor employee” with exceptions for scientists and engineers, not just the CEO, per Section 803 of the 2012 NDAA for those who didn’t know about the change), a point that we’ve made time and again in public comments, letters, blogs, and testimony. It’s also true that if sequestration occurs (looking more and more likely), there will be a cut in the Pentagon budget. 10 percent. Of $560 BILLION. Our point in that particular blog was that it was a bit disingenuous of the CEO—who makes many multiples more in compensation than his workers—of a company that receives 90% of its earnings from government contracts (see page 5 of http://www.northropgrumman.com/pdf/2011_noc_ar.pdf) to talk about “affordability” of the average worker. If Northrop Grumman can’t afford however many employees, how can it afford to continue the CEO’s level of compensation? And if he were going to take a pay or benefit cut, that should’ve been the first thing he said, not “hey, workers, write your member of Congress with your concerns about the sequester.”

That said, there are alternatives to across-the-board firings. There are no restrictions from Congress regarding where the DoD has to make cuts in response to sequestration. The Pentagon is profligate with its spending, and waste is rampant. POGO, along with some of its allies, made recommendations for DoD budget cuts that could be relatively painless (see http://www.pogo.org/pogo-files/reports/national-security/ns-wds-20120508-national-security-defense-savings.html). Although some of the recommended cuts may result in job loss, if the project doesn’t meet our national security needs or is a flawed weapons system, the Pentagon shouldn’t be spending money on it.

Your blog misses an important point. The CEO's salary is capped by the OFPP compensation cap and consequently, reimbursement by the government is limited to $763K. The government does not pay the $26 million you mention in the blog. Sequestration will have no impact on the CEO's salary in terms of the amount reimbursed by the government.

I am hardly a defender of defense contractors. But I am a defender of accurate reporting. Sequestration will result in a sudden cut in budget and could have a significant impact if programs are cut. This has nothing to do with the CEO's salary - it is already capped. Sequestration has to do with the government cutting programs due to a sudden reduction in funding. When programs are cut, contractors will be issued stop work orders and employees will be laid off. The CEO continues regardless. Sequestration is about lay offs of employees working on programs that are cut due to a lack of funding.

I really wish that POGO would present the pertient facts and not just the "facts" that make for a good sound bite. The days of POGO conducting in-depth investigations and presenting all the facts are gone. POGO, you really need to take a step back and ask what is your mission and vision.